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How Domino's Pizza Is Crushing the Competition

Image source: Domino's Pizza.

Domino's Pizza(NYSE: DPZ) is delivering delicious returns for investors: The stock has gained over 50% in the last year, and it's currently trading at fresh historical highs in the neighborhood of $163 per share. This impressive return is fueled by rock-solid financial performance from the business, as Domino's Pizza has a simple and effective recipe for success.

Growth where it counts

Domino's Pizza produced $566.7 million in revenue during the third quarter of 2016, an increase of 17% versus the third quarter in 2015. Same-store sales in the U.S. grew 13% during the quarter, accumulating 22 consecutive years of positive same-store sales in the country. In international markets, same-store revenue increased 6.7%, and the figure has remained positive in the past 91 consecutive quarters. The company opened 316 stores last quarter, ending the period with 13,252 stores around the world, 7,979 of them in international markets.

Profit margins are also moving in the right direction. Operating profit margin increased from 29.3% of revenue to 30.7% of sales. In addition, the company reduced the amount of shares outstanding by 12% year over year via share repurchases. On the back of solid revenue growth, expanding profit margins, and a shrinking share count, Domino's Pizza reported a 43% increase in earnings per share.

This impressive performance comes in times when most other players in the sector are facing considerable difficulties. Based on data from Black Box Intelligence, same-store sales across the restaurant industry declined by 1% during the third quarter, pressured by a 3.4% decrease in traffic. As a reference, competitor Yum! Brands(NYSE: YUM) reported a 1% decline in same-store sales at Pizza Hut during the third quarter, while systemwide sales remained flat year over year.

A rising tide lifts all boats, so even a mediocre business can do well when industry conditions are favorable. But Domino's Pizza is thriving while most competitors are struggling, and this says a lot about the company and its management team.

A simple and powerful recipe

Domino's recipe for success is actually quite simple, yet effective. The company improved its menu in 2010, and management is doing a sound job at driving revenue growth via its loyalty program and digital ordering platforms.

The company's Piece of the Pie Rewards program allows customers to earn points when they order pizzas online, and those points can then be exchanged for free pizzas. Members earn 10 points per day for online orders of $10 or more. After accumulating 60 points, those points can be redeemed for a free medium two-topping pizza. The program is easy to understand, and it rewards repeat customers over big spenders. Focusing on order frequency can be a smart strategy to consolidate loyalty and steal customers away from the competition over time.

Domino's Pizza is an industry leader in digital ordering platforms. Customers can build their profiles and save their favorite orders online, which speeds up the ordering process and also provides valuable information to analyze which menu items are more popular. Customers can order pizzas via all kinds of channels and devices, including Facebook Messenger, Twitter, Amazon Echo, and multiple smartphones and smartwatches, among other possibilities.

The company has even developed a zero-click ordering platform. Customers just need to link the zero-click app to their profile and open it, and as long as there is no change of heart within 10 seconds, the pre-specified order is placed without a single tap, swipe, or click.

According to estimates from Merrill Lynch, Domino's Pizza generated nearly 55% of sales from the digital channel last quarter, while rival Pizza Hut made an estimated 47% of sales online, and the average company in the restaurant industry produces a much lower 20% of revenue from this channel.

Factors such as digital sales and customer loyalty programs are widely recognized as key success drivers in the restaurant industry, so it's not like Domino's Pizza is reinventing the wheel. The main point is successful implementation: The company is doing the important things well, and this is allowing it to drastically outperform the competition.

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